Clever Economists

March 26, 2007

In the current issue, I criticize the recent rush by economists to produce cute and clever work, à la Freakonomics. But cleverness isn't always a bad quality in an economist. Herewith, a guide to four papers (available publicly only as working papers rather than in their final forms) that use cleverness to answer genuinely important questions:

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"The Impact of the Mariel Boat Lift on the Miami Labor Market," by David Card, Industrial and Labor Relations Review, January 1990
Card exploited a "natural experiment" to help sort out whether poor, uneducated immigrants take jobs from native-born Americans. The setting was Miami in the early '80s, just after the Mariel boat lift dumped tens of thousands of Cuban refugees onto the city's shores. Card found that, contrary to the widespread assumption that immigrants bid down wages and raise unemployment for low-skilled workers, the refugees had almost no effect on either figure. Somehow, the Miami labor market had easily absorbed the immigrants.

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"Minimum Wages and Employment," by David Card and Alan Krueger, American Economic Review, September 1994
Card and Krueger waded into the debate about whether the minimum wage leads to higher unemployment. They relied on a natural experiment set in New Jersey in 1992, just after the state's legislature raised its minimum wage to $5.05, the most generous in the country at the time. Card and Krueger compared fast food restaurants in New Jersey with similar restaurants just across the river in eastern Pennsylvania, where the labor market was similar except for the minimum wage. They found that the New Jersey increase did not cause unemployment.

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"The Power of Suggestion," by Brigitte Madrian and Dennis Shea, Quarterly Journal of Economics, November 2001
Economic theory predicts that the amount of money people save depends on certain fundamental factors, such as their disposable income or various financial incentives (like tax subsidies or employer matching). But behavioral economists have long proposed a simpler explanation for why people don't save: They have a strong psychological bias in favor of the status quo, which, for example, might keep them from enrolling in 401(k) plans. Madrian and Shea set out to test this proposition. They studied a Fortune 500 company that had recently changed its 401(k) plan in exactly one respect: Prior to the change, employees had to sign up for the plan voluntarily. After the change, the company enrolled them automatically but allowed them to drop out if they chose to. Enrollment went up dramatically. The result helped change the way we think about promoting retirement saving.

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"Salience and Taxation," by Raj Chetty, Adam Looney, and Kory Kroft, March 2007
Economists have long assumed that people care only about the overall cost of a good or service, not the price of a good before taxes. Chetty, Looney, and Kroft tested this assumption with an experiment at a supermarket: They took 1,000 products and listed the price a customer would pay after taxes just below the actual price tag. Relative to similar products at other stores, demand for the goods fell about seven percent. They also noticed that an increase in the tax on alcohol, which is included in the price displayed at liquor stores, tends to reduce alcohol purchases much more than an increase in the sales tax, which only shows up at the register. The authors demonstrated how the findings have potentially huge implications for tax policy.